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Analyzing rental yields – what this means for investors and renters

An article was published by Fiona Reddan on the Irish Times early this morning examining and evaluating property investment options in and around Dublin today. The article uses the measure of rental yields, how much rental income a property generates as a percentage of its market value, to compare the worthiness of investment options.

The major finding in the article was a negative correlation between housing prices and rental yields, meaning that, in Ireland, higher priced properties generate lower investment yields on average. The worst places to invest includes areas such as Dublin 6, Dublin 4, and Dublin 14, where average sale prices are well above €500,000. The best places to invest includes Dublin 10 and Dublin 2, where the average market value of property is much lower. In Dublin 6 for example, the average sale price is €706,741, while rental yields are only 3.6%. On the other hand, in Dublin 10, the average sale price is €173,478, but the annual rental yield is 10.4%.

These statistics show that in many expensive areas, growth in property prices have accelerated much more than growth in rents. For investors looking to purchase properties as assets to generate revenue, this means looking instead at lower valued properties, where rents have grown faster than property prices. For home seekers looking for a mortgage and to purchase their home, rental yield figures indicate that it is cheaper to rent than to buy in expensive areas such as Dublin 6, whereas mortgage repayments are likely to be a greater proportion of the cost of a property in areas such as Dublin 10. For renters this means that those looking for homes in expensive areas with 3-5 beds are likely to benefit from lower rents, whereas those renting 1-2 bed homes in the city will find much higher rents as a percentage of the property value.

Of course, notwithstanding statistics on rental yields, there are many other factors to consider when investing in property such as the flow of tenants, maintenance costs, income taxes, and capital appreciation. It is important to note that in many instances, the net yield of a property may be a better indicator of its investment value because it factors into account not only rental yields, but also other expenses. In addition, in many areas where the average sale price is greater, there is also greater growth in capital appreciation. For example, in Dun Laoghaire Rathdown, rental yields are only at 4.2%, but property prices have growth more than 40% since summer of 2012. If capital appreciation is taken into account, the less than stellar rental yields in areas such as Dublin 14 and Dublin 6 may not be the worse investments after all.

Overall, it is important to consider rents, costs, and appreciation when investing in or renting property. Ireland as a whole is a great place for investment, having one of the highest average rental yields in Europe and being the second most expensive country to rent in.

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